SEIS/EIS Tax Reliefs In The Hospitality Industry: How To Raise Qualifying Investment In Pubs, Bars And Restaurants

Obtaining investment in the hospitality sector, particularly in pubs, bars, and restaurants, can often prove difficult. However, the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) enable cash strapped hospitality companies to raise capital more easily by offering investor tax reliefs. This article explains how these tax relief schemes can assist with attracting investment in companies that operate pubs, bars and restaurants as well as some of the key issues or considerations when raising SEIS/EIS qualifying investments in such companies.

What is SEIS and EIS?

SEIS and EIS were introduced to help high risk early-stage companies attract equity finance by offering a range of tax reliefs to investors.

SEIS is tailored to smaller companies who have been trading for less than 3 years.

The tax benefits for investors receiving SEIS-qualified shares are as follows:

• the ability to claim up to 50% of the investment back, as a reduction on an income tax bill;
• when held for at least two years no inheritance tax is payable on SEIS shares;
• unrelated capital gains can be reinvested into SEIS shares to qualify for reinvestment relief, which exempts up to 50% of the previous (unrelated) chargeable gain from capital gains tax;
• any gains from disposing SEIS shares are completely exempt from capital gains tax; and
• if the investment is unsuccessful and shares are sold at a loss, the investor can offset their capital losses against their income tax bill.

EIS operates in a similar way however is targeted at larger and more established businesses.

The tax benefits for investors receiving EIS-qualified shares are as follows:

• the ability to claim up to 30% of the investment back as a reduction on an income tax bill;
• any gains made from disposing EIS shares are completely exempt from capital gains tax;
• EIS deferral relief enables investors to defer an existing capital gains tax bill where the gain is reinvested into EIS shares, this enables investors to optimise their usage of personal annual allowances;
• when held for at least two years no inheritance tax is payable on EIS shares; and
• EIS shares also benefit from the reinvestment relief and loss relief (as described above in respect of SEIS).

SEIS/EIS Eligibility: Key Issues

While pubs, bars, and restaurants can be eligible for SEIS/EIS investments, it is important to note that not all businesses or trades will qualify. Eligibility will depend on a number of factors, including the company’s structure, size, assets and historical, current and planned business activities. Some common issues we see with hospitality businesses seeking to obtain SEIS/EIS are outlined below.

Risk to Capital Condition

• Establishing that the investment will meet the risk capital condition for sustainable long-term growth is a big hurdle for many hospitality companies. A company will need to demonstrate that it has both the objectives to grow and develop over the long term and that the investment carries a significant risk that the investor could lose more capital than they gain as a return, inclusive of tax relief.
• To adhere to the risk to capital condition the applying company will need to demonstrate that the purchase (or ownership) of the freehold/leasehold of a pub, bar or restaurant (a capital asset) does not reduce the investor’s risk to capital. For example, if a company is struggling to achieve a profitable exit (and capital return), the sale of a significant asset (e.g. the freehold) could provide the company with the means to return capital to investors. Therefore, in HMRC’s eyes, the ownership of a significant asset could de-risk the investor’s investment and such ownership could cause the company to fail to meet the risk to capital condition.

Excluded Activities

• Some activities of companies are deemed excluded activities e.g., dealing in land, banking, providing legal advice, to name a few. If an excluded activity makes up a substantial part i.e., more than 20% of a company’s trading activities then it will not be carrying on a qualifying trade and therefore be illegible for SEIS/EIS.
• The leasing of any part of a venue (owned by the company) is a potentially excluded activity and should not constitute a substantial part of the trade. This requires demonstrating that any leasing element covers less than 20% of the total trading activities of the applying company. For example, if a pub has an events space which is available for hire, the revenue generated from the renting of such space should be less than 20% of the company’s total revenue and activities.
• Often pubs provide accommodation in addition to food and drinks trade, the provision of accommodation may amount to an excluded activity which could prevent the company from raising SEIS/EIS qualifying investment. Operating/managing hotels or “comparable establishments” is an excluded activity. In the case of a pub, it is possible to argue that the pub trade i.e., serving food and drinks is the company’s main trade and the provision of accommodation is ancillary to this trade and therefore does not form a substantial part of the establishment’s services. HMRC will consider how the company markets itself and the trades it carries out as well as the revenue generated from the different facets of the business to determine whether an excluded activity forms a substantial part of the trade.

New Qualifying Trade

• The acquisition of an existing hospitality business may fall foul of the new qualifying trade requirement. For SEIS, the trade in question must not have been conducted by either the company or any other party for longer than three years at the date the SEIS shares are issued. The trade must operate on a commercial basis and must not consist wholly or as to a substantial part in carrying on of ‘excluded activities.’

No Business Acquisitions

• If purchasing an existing premises, e.g. that a restaurant operates from, the old trade will need to cease and the new trade will need to be substantially different from the historical trade. Operating the business for only a short amount of time, before closing to start refurbishment of the previous premises could disqualify this applying company.
• For instance, if a company aims to establish a new café serving lunch to local businesses and finds a location currently occupied by a cocktail bar serving late-night drinks with a limited selection of food, they could consider purchasing the lease of the former bar using a portion of EIS investment monies. However, to adhere to the use of money condition, the company must acquire the physical space only. It cannot use the cocktail bar’s name nor capitalise on the existing customer base or goodwill. Additionally, no transfer of stock, staff, or branding can form part of the acquisition of the lease. SEIS / EIS advance assurance should be sought prior to any acquisition.

Gross Assets Requirement

• To be eligible for SEIS, the company must have gross assets of no more than £350,000 immediately before the SEIS shares are issued. This encompasses both fixed tangible assets, such as catering equipment and furniture, and current assets, which include cash and short-term liquid assets, easily converted into cash within a year. This may be an issue where the applying company owns the freehold of the pub/restaurant. Should the company function as the parent entity of a group, the asset valuation must account for the aggregate assets of the entire group. EIS may still be available even if the company fails the SEIS gross assets test as under EIS companies can have up to £15 million of gross assets.

Whilst the above are common issues we see with SEIS/EIS applications in the hospitality industry, each application is different and there may be nuanced issues which you should seek specialist advice on.

How can JLN help?

For more information about how we can assist you with SEIS/EIS applications, please click here.

Our SEIS/EIS experts have a wide depth of experience with SEIS/EIS matters and know how to resolve both common and uncommon issues that might arise during the process of applying for SEIS/EIS. We ensure that information is presented to HMRC in the right way, with persuasive arguments which reference the relevant parts of HMRC’s own guidelines and the legislation governing SEIS/EIS.

To book an introductory call with one of our team, please send an initial email to wewillhelp@jonathanlea.net (with a brief description of the matter) and one of our team will liaise with you to fix a time to speak to one of our specialists.

This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited 2024.